Who’ll Tell Grandma Her Money Market Fund May Not Be Safe?

January 13th at 6:14am by Tom Lydon

Money market funds are back in the spotlight with some managers recently announcing increased disclosure, including releasing the value of money funds on a daily basis. I still think this story isn’t getting the press it deserves.

With $2.7 trillion in assets under management, or twice the size of the exchange traded fund universe, a good chunk of wealth is in the cross-hairs as regulators consider reforms to prevent a potential run on money market funds. The nation’s oldest money fund was forced to “break the buck” during the financial crisis because it owned Lehman Brothers debt.

There has been talk the SEC could require money market funds to move to a “floating” net asset value, or NAV. This would be a sea change. Money market funds are yielding about zero, but at least investors have the peace of mind that they can’t lose money.

Regulators want to reform the money market fund business, but oppose a strong lobby with deep pockets. The fund industry is not in favor of a floating NAV and would rather keep the implied government backstop for money market funds in place.

Yet who is going to tell grandma her money market fund may not be safe if the business moves to a floating NAV?

The Financial Stability Oversight Council is considering various options for U.S. money market fund reforms, including a floating net asset value, which would allow money funds to¬† shift away from $1; a capital buffer of up to 1% of the fund’s value, along with a delay on redemptions; or a buffer of up to 3%, reports William Fry for Lexology.

With a floating NAV, money markets would be impaired in a rising rate environment. Moreover, any added regulations and restrictions would further weigh on their returns.

Reform talks stalled after the SEC did not receive majority vote to proceed. With SEC Commissioner Elisse Walter, a supporter of Chairman Schapiro’s proposed money market fund reforms, to step in as SEC Chairman, the SEC may not abandon the reforms.

Money market reform has gained momentum in recent years after the world’s largest money funds “broke the buck,” or dipped below $1 per share, after the collapse of the Lehman Brothers, one of the fund’s investments. The collapse fueled wide spread panic, with investors making a run on the fund.

According to Federal rules, money funds are not allowed to deviate from $0.9950 and $1.0050 per shares. In the event the fund dips below $0.9950, a money market fund could face liquidation.

Recently, major fund providers have taken steps to provide more transparency in their money funds, disclosing values on a daily basis rather than monthly, reports Kirsten Grind for the Wall Street Journal. After Goldman Sachs announced its intent to disclose values of their funds each day, J.P. Morgan Chase, BlackRock and Dreyfus said they will also list net asset values each day. [Short-Duration Bond ETFs vs. Money Market Funds]

Robert Plaze, former deputy director of the SEC’s division of investment management, believes that the daily disclosures could make investors more likely to pull money out as a result of seeing any small blips.

Since the money market funds typically trade at a fixed net asset value of $1 and have been the go-to, safe investment to park cash, any changes that puts the $1 standard at risk could put pressure on the whole $2.7 trillion money fund market.

As an alternative, some have already taken an interest in ultra short-term duration bond ETFs as an alternative. Short-duration ETFs include PIMCO Enhanced Short Maturity Strategy (NYSEArca: MINT), SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL), iShares Barclays Short Treasury Bond (NYSEArca: SHV) and Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY). [Money Market Fund Reform Would be Boon for Short-Duration ETFs]

For more information on money market funds, visit our money markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.